This past week, the Wall Street Journal ran an article about the dire state of public pension funding in the very wealthy state of Connecticut. The Journal drew appropriate irony to the fact that America's #1 state in per capita income also ranked a disturbing 48th in the funding of its public employee pension liabilities. Home to hedge fund managers, corporate executives and Wall Street elite, Connecticut has approximately half of what it needs to fund its employee pensions. The state has an unfunded liability of $26 billion, with pension liabilities doubling over the past decade.
As readers are becoming increasingly aware, the unfunded pension liabilities of US states, cities, counties and local districts have become an issue of urgent concern. The pension deficit, nationally, has been estimated as high as $4 trillion. Let's stop and think about that number for a moment. If US state and local governments contributed $275 million per day to pay off this deficit (which is considerably more than what is currently being paid) it would take 40 years to right the ship. And that's just the liability for current retirees and employees. Any new hire would add to the funding burden. Further, as the Journal article points out, even these projections are based upon an assumed earnings rate going forward of 8%. If markets correct and deliver returns to pensions of, let's say, 4% or heaven's forbid, negative returns the deficits will increase disproportionately.
Now, I understand that some people read about the magnitude of government pension deficits and roll their eyes, already convinced that government in most localities is something of a mess. So what's new? The problem is that this issue will not and cannot go away on its own. Governments will need to turn to taxpayers to raise revenue to pay these deficits.
What should be obvious to all, but what many people simply do not realize, is that state and local governments rely upon taxes from individuals for the vast majority of the revenue that they raise. Be they personal income taxes, sales taxes, property taxes, motor vehicle license or fuel taxes, or taxes on services like utilities, telephone, or otherwise, the individual taxpayer provides an estimated 91% of state and local tax revenue, nationally.
While 70% of those polled in a recent survey by the Reason Foundation indicated that they would oppose reducing benefits to public sector retirees, this same group also opposed raising taxes to pay for benefits. Those polled were against raising taxes, against reducing government services, and against reducing pensions for retired workers. This failure to appreciate the linkage between local government liabilities and the tools by which governments fund these liabilities, is a primary obstacle in addressing the growing and unsustainable public sector pension crisis.